EXIT STRATEGIES

Steve Miles, general manager of Jerry Kelly Heating and Air Conditioning, St. Charles, MO, Contracting Business.com’s 2006 Residential Contractor of the Year, had a rocky experience of management succession, and is now undergoing a much smoother path of ownership succession.

Miles joined Jerry Kelly in 1994, shortly after marrying into the family. Despite working his way through the ranks, first as dispatcher, then service manager, and finally outside salesman, there was still a great deal of consternation in the company when he was named general manager in 1998.

Behind the scenes, in 1998, company owners Jerry and Janet Kelly were considering selling the company to a consolidator. Miles says he looked at what the consolidator was offering, and felt he could take the lessons he was learning from his Air Conditioning Contractors of America (ACCA)MIX Group, and run with them.

The company hits its stride under Miles, going from a $2.5 million company with 27 employees in 1998 to a $13 million company with 68 employees today.

Miles and his wife now are in the process of purchasing the company from the Kellys (Jerry retired three years ago). He says the key to ownership succession planning is not that different from the key to management succession planning: make sure there are written processes and procedures in place, and everyone is on the same page.

“The most important part of succession planning is building a machine that anybody can run or that can run itself,” Miles says “If you do that, it’s going to be much easier to sell or turn over to the next generation.”

“I’m hoping my children can grow into the business,” Miles continues. “But we’re building the company to be a self-sustaining, stand-alone operation with solid procedures, so that we can eventually either sell it to them or find another company or a consolidator that would buy it. That won’t be difficult if we have the procedures in place that ensure the company will continuously function at a high level of quality from both a technical and business standpoint.”

Miles advises not to hesitate to get good outside help for matters such as the business’s valuation. Miles hired Vicki LaPlant, a Contracting Business.com Editorial Advisory Board member, and her husband, John, to arrive at an accurate valuation and help determine how payments will be made.

“People enter a business partnership like they enter a marriage: wide-eyed and full of hope, which is awesome,” he says. “But sometimes unexpected things happen, and in the absence of an actual written plan or agreement, emotions take over. Everyone involved is going to take a hard line as to what they think they deserve, and what they think is right. If things don’t work out the way people expect them to, the reaction is anger and retaliation. Conflict is the last thing you want in a succession plan.”

Casey is a veteran of a two types of business successions: one in which his father slowly sold him shares of their company, and another in which he and his father decided to sell their company to a consolidator.

“My dad made it clear early on that he would not ‘give’ me any of the company. In order for me to appreciate the company and protect it and take it seriously, I’d have to earn it. That included paying for my shares of ownership. I think that was pretty visionary of my dad. He knew that if I was working hard every day to buying a share a year, it would be my pride and joy and I’d be committed to it.”

Casey says succession planning should be ongoing throughout a company’s life and truly involves making plans: plans for a company’s success, and for the future vision of the company to include assets the company doesn’t even have yet.

“You have to map out everything, because it becomes open season on anything you don’t cover,” he says. “We’ve all heard repeatedly, ‘Don’t let the courts decide.’ That’s so important in business succession because you don’t want some arbitrary third party deciding what will happen to your business. They don’t know what it took to build it in the first place.”

rivately held, family businesses make up the majority of businesses in our industry and for a majority of those, an exit strategy is not even a blip on the radar screen. Most privately held, family businesses are struggling with the more immediate issues of cash flow, marketing, and growing profits. But those companies who grow past these immediate concerns need to begin planning an exit strategy for its owner sooner rather than later. The procedure for a family-run business takes from five to 10 years. We have seen five different exit strategies used by privately-held, family businesses in our industry.

1) Sell to a competitor / franchisor.

2) Sell to people outside the industry.

3) Sell to a key management group within company.

4) Use an employee stock ownership plan (ESOP).

5) Transfer/sell to family member(s).

Two things should be done now to make the implementation of any exit, planned or unplanned, easier. First, the company should either incorporate or become a Sub Chapter S Corporation, and create a legitimate board of directors. A legitimate board of directors is one where at least 60% of the board members are outside the family: such as a banker, an accountant, an attorney, another small business owner from outside the industry, and a trusted consultant.

Most privately-held family owned companies have a board in name only to meet the requirements of incorporation. Family business owners often have a difficult time separating the business from the individual family members or owners. And the thought of having an active, functioning, decision making board with 60% of its members from outside the company and ownership is frightening.

A good board is the neutral advocate for the business. It facilitates implementation of strategies that ensure that the value of the business continues to increase. To have value, the business must be a distinct entity from the owner/leader and his or her personality. Therefore, the second, and most important thing management/ownership must do is implement systems, processes, and measurements that show the value of the systems. The systems guarantee the company will be successful and grow even when current ownership exits. When systems are in place, a business owner has many exit opportunities. — Vicki LaPlant, CB Editorial Advisory Board member, and owner of Vital Learning Experiences, Pottsboro, TX. vleishvac.com

Best Succession Plans Build Managers & Leaders

Simply having someone waiting in the wings to take the place of the current owner doesn’t make for a successful succession plan.

The first principle is that there’s a difference between managing and leading. Most of today’s management literature confuses the two, and assumes that they’re one and the same but they aren’t. They’re very different, and require different talents and skills.

The role of a manager is to turn talent into performance. To identify the talents of each employee, put each employee in a position that plays to their strengths, and then make sure they have all the support they need to excel in their job.

A leader, on the other hand, has an entirely different role. His role is to show a better future. He needs to paint a picture of a future worth striving for, and to communicate that vision and common purpose to every employee throughout the organization. He must be an optimist. Even when things go wrong, he must be able to see that eventually the sun will shine again, to reassure employees that setbacks are a regular part of life, and that it will be good again.

A successful succession plan develops both managers and leaders.

At Morris-Jenkins we have a monthly, two hour, training session for our seven executive managers and our eighteen directors and supervisors. In addition, for eight weeks during January and February each year, we offer weekly training. This training focuses on the skills needed to be a strong manager, with the intent to grow the depth of our management team.

My successor, Jonathan Bancroft, is receiving management training along with the rest of the team. He’s worked his way through our organization, from maintenance tech to service tech, to sales, to service management, and now to vice president of field operations. But he’s also being exposed to the best leadership thinking of today. He’s attending leadership conferences, as well as studying on his own.

When it comes time for me to step up as chairman of the board and relinquish my role of CEO, Jonathan will be prepared to step in, and the organization will lose none of its energy or vitality. — Dewey Jenkins, CEO, Morris-Jenkins, Charlotte, NC. Jenkins is a